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HKMA Issues Draft Guidance on Funding and Liquidity in Resolution

The Hong Kong Monetary Authority (HKMA) has published a draft chapter of the code of practice for authorised institutions (AIs) on liquidity and funding in resolution (LFIR). 

The Financial Stability Board (FSB) has identified LFIR as an important subject to be addressed through resolution planning. The regulator “expects an AI to be able to demonstrate that it has in place the LFIR capabilities and arrangements.”

According to the HKMA, an AI’s LFIR capabilities and arrangements developed in line with this chapter are expected to consider the various phases including: (i) the lead up to resolution; (ii) the stabilization phase; and (iii) the post-stabilization restructuring phase and cover each “material currency”, at the level of each “material LFIR entity” and at the level of the AI’s group.

The HKMA also expects banks to be able to model liquidity and funding needs in a resolution scenario over various time horizons.

In establishing LFIR capabilities and arrangements, AIs can leverage existing capabilities and arrangements developed for other reasons, such as recovering planning, contingency funding planning, standards for liquidity risk management and compliance with supervisory requirements. 

The draft chapter also describes certain corporate governance processes that should be in place, including oversight and decision-making and organisational arrangements. The regulator said that these processes will help support their ability to meet liquidity and funding demands. 

Concerning implementation, the HKMA will first request AIs to identify their “material LFIR entities” and “material currencies” and self-assess their existing capabilities and arrangements against the demands outlined in the new chapter.

AIs will have to submit the results of their self-assessments to the HKMA with work plans and proposed timelines for complete compliance.

The draft chapter is open for consultation until March 14th, 2022.